The bank’s B2/Not Prime long-term and short-term foreign currency deposit ratings were also affirmed. The outlook on the long-term global scale ratings is stable. According to Moody’s, NBU’s standalone E+ BFSR, which maps to B2 on the long- term scale, remains constrained by:

very high, and rapidly growing, single name concentration in the bank’s loan book;

increasing pressure on the bank’s capital adequacy stemming from the rapid pace of loan growth and low internal capital generation;

high reliance on wholesale funding that raises refinancing issues;

uncertainties over the unseasoned nature of the newly originated loan book as well as over quality of non-core assets.

At the same time, the rating reflects NBU’s sound domestic franchise and its privileged position as an agent for government strategic programmes as well as its access to foreign funding.

In 2010, NBU increased its loan portfolio by over 40%, and Moody’s observes that this growth was mainly attributable to lending facilities for large domestic entities under government programmes and fuelled by funds from the state authorities as well as by credit lines from international financial institutions (IFIs). As a result, the bank’s exposure to the ten largest borrowers have substantially increased and accounted for 61% of the loan book and over 400% of Tier 1 capital at year-end 2010, rendering NBU’s profitability and capital vulnerable to the performance of a small number of clients. A rapid increase in the single-name concentration in the bank’s loan book in 2010 is a sourec of concern for Moody’s.

Although the bank has access to relatively cheap funding both from the government of Uzbekistan and from IFIs, it has very limited power to set interest margins on those loans originated under the government state-guaranteed programmes that support selective industries. As a result, the bank’s internal capital generation was historically low, with return on equity (RoE) of 10.4% in 2010. The rapid pace of loan growth and low profitability resulted in a decline in its Tier 1 capital to 11% as of 31 December 2010, from more comfortable 14% as at December 2009.

Moody’s sees a further pressure on the bank’s capital in 2011 given NBU’s willingness to extend loans which are not backed by any announced plans for an external capital injection.

NBU reduced the level of problem loans (defined as impaired in accordance with IFRS) to 15.5% as at year-end 2010 from over 30% as at year-end 2008, as the bank converted the overdue facilities of insolvent borrowers to direct equity investments of problem entities – aiming to restore production and compensate investments. Moody’s notes that the bank’s ability to manage this exposure, which absorbed about 30% of Tier 1 capital at YE2010, together with maintenance of adequate quality of the unseasoned loan portfolio and evolution of single-name concentrations, will represent key rating drivers for the bank going forward.

At the same time, NBU’s GLC deposit rating of Ba3 received a two-notch uplift from the bank’s long-term scale, based on Moody’s assumption of very high probability of extraordinary support from the government in case of distress. Given that the state owns 100% of NBU, the bank is likely to benefit from access to capital and liquidity, as it is the country’s largest bank and plays a crucial role in maintaining the system’s stability. NBU also serves strategically important sectors (both socially and economically), and its international funding franchise benefits from state guarantees.

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